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For insights on the retirement crisis, I asked Hedrick Smith, author of the national bestseller Who Stole The American Dream, to comment. Smith, a Pulitzer Prize-winning former New York Times reporter and editor and Emmy award-winning producer/correspondent, has established himself over the past 50 years of his career as one of America’s most distinguished journalists.

Most people assume they’re savvy about 401(k)s, but here are three surprises for Boomers counting on 401 (k)s as their future financial lifejackets: (1) how it got started – accidentally; (2) how much they should regularly save to build a safe retirement nest egg; and (3) how big a bite mutual funds take out of their gains.

The fact is that the 401(k) has not worked out well for millions of average Americans and one big reason is that Congress gave birth to the 401 (k), it was never intended to become a nationwide retirement system.

The main political push for the 401 (k) came from Kodak and Xerox, which wanted a tax shelter for profit-sharing bonuses for their executives and managers. But the Internal Revenue Service had previously ruled that profit-sharing plans must include rank and file employees. Irving Trust of New York and a dozen other companies had such plans. So when the 401 (k) was written into law in 1978, it followed the Irving Trust model. It covered only a small circle of companies. Not until several years later was it opened up to nationwide use by the Reagan Treasury Department. Then it took off. The mutual fund industry, spotting a financial bonanza, sold do-it-yourself 401 (k) retirement as “power to the people,” and millions of Americans took the bait, thinking they could beat the market.

It has been a rough ride for most average investors. There have been lots of headaches. Some people didn’t even sign up. Others skimped on contributions. Many cashed out when they switched jobs. Others borrowed from the 401 (k) and didn’t pay back. So the money was gone when they retired.

But probably the most universal problem, financial experts say, is that even the best, most reliable 401(k) contributors have not put in enough money. People who want to retire at roughly their pre-retirement standard of living typically need a nest egg 10 to 12 times their final working salary, according to the Employee Benefits Research Institute, a Washington think tank.

Median household in the U.S. $50,000 a year. At that level, EBRI says, your nest egg should be $500,000 to $600,000 at retirement. But as of 2011, EBRI reports, the median 401 (k) balance for people in their 60s after 20 years in the program, is just $85,000 – far short of what they need even to cover their basic economic needs.

The hard truth is that building a proper nest-egg takes much more ambitious savings than virtually any 401(k) plan envisions. The best plans typically let rank-and-file employees sock away 6% of their pay and provide a 3% company match, for a total of 9%. But EBRI’s experts suggest the combined target should be about 15% and Dallas retirement consultant Brooks Hamilton said 18%. Most plans, says Hamilton “are half what they need to be.”

One reason for bigger contributions is that you don’t actually reap the full benefits of your long-term gains. Mutual funds or financial managers take a big bite – much bigger than you think. Their fees for handling stock transactions, setting up funds, doing the paperwork and managing your account are listed in the fine print in investment brochures that most people don’t bother to read.

Hedrick Smith, photo by Foster Wiley

But Jack Bogle, founder and longtime CEO of the Vanguard mutual funds, spelled out the arithmetic to me. According to Bogle, mutual fund fees and transaction costs average 2% a year, though funds differ significantly. The numbers sound small, but they have a huge impact on you.

With steady long-term investing, says Bogle, the individual 401 (k) holder can achieve astounding results. Historically, a mix of stocks and bonds gains an average of 5% a year. Compounding year after year at that rate, $1 becomes $7.04 over 40 years, or a $100,000 input becomes $704,000. The length of time is crucial. Over 25 years, Bogle calculates, that same $1 in savings goes up to $3.39, not $7.04. The growth is slow at first, says Bogle, but it shoots up steeply as the years roll on.

The numbers change dramatically when you figure in the mutual fund bite. Subtract fund fees of 2% from the expected gain of 5% and that leaves the 401 (k) holder with an average annual gain of 3%. Just like long-term gains, the mutual fund bite also has a compounding effect. As Bogle figures it, the projected gain from $1 to $7.04 over 40 years gets cut way down by the mutual fund bite – down to $3.26.

“Where did the nearly $4 difference go?”Bogle asks. “It went to the fund or to Wall Street in fees. So you the investor put up 100% of the capital. You take 100% of the risk. And you capture about 37% of the return. The fund or Wall Street puts up none of the capital, takes none of the risk and takes out 63% of the return.”

That is why Bogle advocates stock index funds, baskets of diverse stocks combined in an index to represent the whole market. Index funds cost the customer far less in fees because the index has a fixed portfolio and does not require a fund manager to trade in and out of stocks. “You can buy an index fund for one-tenth of one percent,” Bogle says. “No turnover expense. No sales load or commission. You get 4.9% investment gain out of the 5% growth. You get $6.78 out of that $7.04 instead of seeing most of it go to the financial industry.”